2016 (6) TMI 1498 - AT - Income Tax

Court Directs 5% Net Profit Rate for Labor Cooperative Society, Dismisses Other Issues u/s 80P(2)(vi.

The court partially allowed the appeal by directing the Assessing Officer (AO) to apply a 5% net profit rate instead of the 15% initially estimated, ... Estimation of income @ 15% of the contract receipts - adopting a higher rate of percentage, especially in the case of the assessee where he was executing the repairs of roads/buildings of the Government - HELD THAT:- Hon’ble Allahabad High Court in CIT vs. Target Construction Co. Ltd.[2014 (9) TMI 57 - ALLAHABAD HIGH COURT] while adjudicating the case of road contractors had laid down the proposition that the net profit rate of 5% as estimated by the ITAT should be applied. Admittedly, when an estimation has to be made in the hands of any of the assessee, fair estimate should be made keeping in mind the nature of activity carried on by the said person and also taking into consideration the past or the future results shown by the assessee in this regard. There is no merit in estimating the net profit in the case of the assessee @ 15% especially in view of the past and future results shown by the assessee from year to year where the assessee is an association of labourers who, in turn, were taking up the Government contract for the repair of roads/buildings. AO is directed to compute the income in the hands of the assessee by applying net profit of 5%. The assessee is not entitled the claim of deduction u/s 80P(2)(a)(vi) of the Act - Appeal of the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe judgment addresses the following core legal issues:Whether the CIT(A) erred in confirming the disallowance of deduction claimed by the appellant society under section 80P(2)(vi) of the Income-tax Act, 1961.Whether the CIT(A) erred in upholding the rejection of the appellant's book results and confirming the estimation of net profit at 15% of contract receipts.Whether the appellant society, being a labor cooperative society, is eligible for deduction under section 80P(2)(a)(vi) of the Act.Whether the CIT(A) erred in not appreciating that all laborers are members of the appellant society.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Disallowance of Deduction under Section 80P(2)(vi)Relevant Legal Framework and Precedents: Section 80P(2)(vi) of the Income-tax Act provides deductions for cooperative societies engaged in certain activities. The appellant claimed this deduction as a labor cooperative society.Court's Interpretation and Reasoning: The appellant did not press this issue, and thus, it was dismissed as not pressed.Key Evidence and Findings: The appellant accepted the denial of the deduction under section 80P(2).Application of Law to Facts: Since the appellant did not pursue this issue, the court did not delve into a detailed analysis.Treatment of Competing Arguments: No competing arguments were considered as the issue was not pressed.Conclusions: The court accepted the appellant's stance and dismissed the issue as not pressed.Issue 2: Estimation of Net Profit at 15%Relevant Legal Framework and Precedents: The estimation of income by the Assessing Officer (AO) was based on rejecting the books of account and applying a net profit rate of 15% on contract receipts.Court's Interpretation and Reasoning: The court found that the estimation of a 15% net profit rate was not justified, especially considering the appellant's historical and future profit rates, which were significantly lower.Key Evidence and Findings: The appellant's historical net profit rates ranged from 0.29% to 0.67%, and the AO's estimation of 15% was inconsistent with these figures. The court also considered similar cases of other labor cooperative societies.Application of Law to Facts: The court applied the principle that fair estimation should consider the nature of the appellant's activities and historical results. It referenced the Allahabad High Court's decision in CIT vs. Target Construction Co. Ltd., which suggested a 5% net profit rate for similar activities.Treatment of Competing Arguments: The appellant argued against the high estimation, while the Revenue supported the AO's decision. The court sided with the appellant, emphasizing fairness and consistency with past results.Conclusions: The court directed the AO to compute the appellant's income using a 5% net profit rate instead of 15%.Issue 3: Eligibility for Deduction under Section 80P(2)(a)(vi)Relevant Legal Framework and Precedents: The appellant claimed eligibility for deductions under section 80P(2)(a)(vi) as a labor cooperative society.Court's Interpretation and Reasoning: The appellant did not press this issue, leading to its dismissal.Key Evidence and Findings: The court noted the appellant's acceptance of the denial of this deduction.Application of Law to Facts: The lack of pursuit of this issue by the appellant resulted in no detailed application of law.Treatment of Competing Arguments: No arguments were considered since the issue was not pressed.Conclusions: The issue was dismissed as not pressed.Issue 4: Membership of Laborers in the SocietyRelevant Legal Framework and Precedents: The appellant argued that all laborers were members of the cooperative society, impacting the deduction eligibility.Court's Interpretation and Reasoning: This issue was not pressed by the appellant and was consequently dismissed.Key Evidence and Findings: The court acknowledged the appellant's acceptance of the CIT(A)'s decision.Application of Law to Facts: No detailed application was necessary due to the lack of pursuit.Treatment of Competing Arguments: The court did not consider competing arguments as the issue was not pressed.Conclusions: The issue was dismissed as not pressed.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'There is no merit in estimating the net profit in the case of the assessee @ 15% especially in view of the past and future results shown by the assessee from year to year where the assessee is an association of laborers who, in turn, were taking up the Government contract for the repair of roads/buildings.'Core Principles Established: The estimation of income should be fair and consistent with historical performance and the nature of the business. A net profit rate of 5% is deemed appropriate for labor cooperative societies engaged in government contract work.Final Determinations on Each Issue: The appeal was allowed in part, with the court directing the AO to apply a 5% net profit rate instead of 15%. The other issues were dismissed as not pressed.